Dold v Murphy
[2018] NZHC 994
•9 May 2018
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2016-404-3226 [2018] NZHC 994
BETWEEN ROGER MURRAY LORIMER DOLD
First Plaintiff
ROGER MURRAY LORIMER DOLD, PENELOPE ANNE DOLD and KEVIN DAVID PITFIELD
Second Plaintiffs
CHRISTOPHER JAMES JACOBS
Third PlaintiffCARRAJUNG HOLDINGS LIMITED
Fourth PlaintiffAND
PETER JAMES MURPHY
First Defendant
LUBERON NOMINEES LIMITED
Second DefendantSIENA CONSULTANTS LIMITED
Third Defendant
Hearing: 22 March 2018 Appearances:
D Heaney QC and K Dillon for the Plaintiffs and Marine Tourism Management Ltd
S O McInally and N W Coyle for the Defendants
Judgment:
9 May 2018
JUDGMENT OF ASSOCIATE JUDGE R M BELL
This judgment was delivered by me on 9 May 2018 at 3:00pm
pursuant to Rule 11.5 of the High Court Rules.
…………………………………
Deputy Registrar
DOLD v MURPHY [2018] NZHC 994 [9 May 2018]
CONTENTS
Paragraph What the case is about
[5]
The parties’ claims
[16]
The discovery application
[21]
Preliminary matters
[23]
Further discovery by Messrs Dold and Jacobs
[33]
Personal expenses documents (motor vehicles) [33]
Income protection insurance [37]
Reservation system software [40]
Employment of Mr Peter O’Reilly [45]
Documents evidencing strained relationship between Messrs Dold and Jacobs [51]
Documents containing or relating to forecasts, including associated working
papers for Cruise Whitsundays from April 2012 and afterwards [55]
Documents containing comments, records, advice, opinions as to the
decisions by Mr Dold and Mr Jacobs to pay AUD$2million each to Mr Murphy [61]
Documents recording evidence or otherwise relating to Mr Dold’s wish to take more than 30 per cent rollover equity in Experience Australia
Topco Pty Ltd [64]
Income split between Mr Jacobs and his wife, Leigh Efferion,
including income tax returns and bank statements [67]
Documents to be disclosed by Marine Tourism Management Ltd
Financial statements for the years ending 31 May 2011-31 May 2017 [71] Records of directors’ expenses met by Marine Tourism Management Ltd [75] Records of remuneration paid to Mr Jacobs and his wife,
including bank statements and tax returns [76]
Mr Pitfield [78]
Outcome [88]
[1] The defendants apply for the plaintiffs to make further discovery under r 8.19 of the High Court Rules 2016 and for non-party discovery against Marine Tourism Management Limited under r 8.21. The parties were ordered to make standard discovery on 30 May 2017. The plaintiffs have so far provided six affidavits of documents:
(a)Roger Dold, sworn 15 June 2017, 55 pages;
(b)Roger Dold, sworn 26 August 2017, 6 pages;
(c)Christopher Jacobs, sworn 29 August 2017, 9 pages;
(d)Kevin Pitfield, sworn 1 November 2017, 40 pages;
(e)Christopher Jacobs, sworn 1 December 2017, 80 pages; and
(f)Roger Dold, sworn 27 February 2018, 5 pages plus exhibits.
The last three affidavits were filed in response to the defendants’ application of 15 September 2017. The defendants have provided two affidavits of documents dated 3 July and 4 September 2017.
[2] Rule 8.2 of the High Court Rules requires the parties to cooperate on discovery to ensure that discovery and inspection are both proportionate and facilitated by agreement on practical arrangements. In correspondence, the plaintiffs’ lawyers proposed meetings with the defendants’ lawyers to see whether the complaints of inadequate discovery could be resolved without a court hearing. The defendants declined to meet.
[3] Given the extent of discovery made to date, at the start of the hearing I explored with counsel whether an approach similar to that in practice note SC Eq 11 of the Supreme Court of New South Wales might be adopted. In the Equity Division, orders for disclosure are made only after the parties have served their evidence (except in exceptional circumstances). Before making an order the court has to be satisfied that it is necessary for the resolution of the real issues in dispute. The defendants would not, however, allow themselves to be diverted. They said that there were issues of
principle which required the court’s decision. These suggested alternatives would not meet their concerns.
[4] The four-step process proposed by Asher J in Assa Abloy NZ Limited v Allegion (NZ) Limited for applications under r 8.19 is by now well-known and accepted and does not need to be repeated.1 On the application for non-party discovery by Marine Tourism Management Limited the plaintiffs’ lawyers appeared for it and addressed the application against it as if it were an application for discovery by the plaintiffs.
What the case is about
[5] Roger Dold, Christopher Jacobs and Peter Murphy have been directors and, through their family trusts, shareholders in companies carrying on business in marine tourism. This account does not go into every detail pleaded in the statement of claim and the statement of defence. They started in 1989 when Mr Dold and Mr Jacobs acquired Fullers Cruises Northland Ltd (later re-named Fullers Bay of Islands Ltd). Mr Murphy became involved in 2001. Fullers Bay of Islands Ltd was sold in December 2004. In 1998 they acquired a half interest in South Sea Cruises Ltd in Fiji and in 1999 the entire business. That was sold in 2012. In 2004 a cruise business in Queensland was established — “Cruise Whitsundays”. In July 2012, the Cruise Whitsundays business expanded by acquiring the business and assets of other cruise companies. The assets included land at Port of Airlie and a sea-bed licence. Further land was acquired in 2015. In 2016 the Cruise Whitsundays business was sold. The dispute in this case arises out of that sale.
[6] In April 2003 a holding company, Marine Tourism Holdings Ltd was incorporated. All three men were directors. On incorporation the shareholding was:
Dold trustees (second plaintiffs) 46.9 per cent Carrajung Holdings Ltd (fourth plaintiff) 46.9 per cent Siena Consultants Ltd (third defendant) 6.2 per cent
1 Assa Abloy NZ Limited v Allegion (NZ) Limited [2015] NZHC 2760 at [14].
[7] The Dold trustees, the second plaintiffs, are a family trust associated with Mr Dold. Mr Pitfield, one of the Dold trustees, is a chartered accountant and director of Staples Rodway Ltd, chartered accountants. He provided accountancy advice to the group throughout. Carrajung Holdings Ltd, the fourth plaintiff, is the trustee of the Carrajung Trust associated with Mr Jacobs. Mr Pitfield was once a trustee of the Carrajung Trust, but retired in 2014. Siena Consultants Ltd, the third defendant, is a company associated with Mr Murphy. Later Luberon Nominees Ltd, a corporate trustee, the second defendant, held shares associated with Mr Murphy’s interests.
[8] Mr Murphy has a legal background. The statement of claim alleges that he acted as legal advisor to all the parties and they looked to him for legal advice and guidance. The statement of defence on the other hand rejects that characterisation: Mr Murphy was not qualified to practise law in Australia, but he acted as an executive director.
[9] An operating company, Marine Tourism Management Ltd, was incorporated in June 2010. The three men were all directors. Their family trusts held the shares, again in the percentages: Dold trustees — 46.9 per cent, Carrajung Holdings Ltd — 46.9 per cent, and Luberon Nominees Ltd — 6.2 per cent.
[10] In 2003 an Australian company, Marine Tourism Holdings Pty Ltd, was incorporated. Mr Dold, Mr Jacobs and Mr Murphy were all directors. The company’s name was changed to Cruise Whitsundays Pty Ltd. At the outset, Marine Tourism Holdings Ltd was the sole shareholder of Cruise Whitsundays Pty Ltd. In 2012, Marine Tourism Holdings Ltd transferred its shares in Cruise Whitsundays Pty Ltd to the three shareholding trustees:
Dold trustees 46.89 per cent Carrajung Holdings Ltd 46.89 per cent Luberon Nominees Ltd 6.22 per cent
[11] Both sides rely on a shareholders’ agreement of 25 January 2005 which related to shareholdings held by the three men and their family trusts for Marine Tourism
Holdings Ltd and related companies. The plaintiffs say that there were express terms as to maximising shareholders’ returns on funds invested and not acting in a manner inconsistent with the main operative objectives of the company. The defendants say that there was an implied term that the shareholders would perform their obligations in a reasonably competent and careful manner.
[12] In 2016, a sale of all the shares in Cruise Whitsundays Pty Ltd was negotiated for a price of AUD$112m. The plaintiffs say that a memorandum of understanding was drawn up and signed by the proposed purchaser and the directors and shareholders of Cruise Whitsundays Pty Ltd to trigger the due diligence process. The purchaser’s agent required acceptance of the purchase price of AUD$112m by 8 August 2016. The plaintiffs say that on 3 August Mr Murphy stipulated that, as a condition of Luberon agreeing sell its shares, he should be paid an additional AUD$5m above the shareholding entitlement of Luberon Nominees Ltd. After discussion that demand was reduced to AUD$4m–$2m payable by the first and second plaintiffs and $2m by the third, fourth and fifth plaintiffs. The plaintiffs say that they agreed to this under protest and under illegitimate pressure from Mr Murphy that he would not agree to the sale going ahead unless they acceded to his demand. After due diligence, an agreement for the sale of the shares was signed on 15 September 2016 for AUD$112m. In this proceeding the plaintiffs wish to recover the AUD$4m.
[13] The purchaser of the shares in Cruise Whitsundays Pty Ltd was Experience Australia Topco Pty Ltd. Under the sale, the selling shareholders were entitled to a combined allocation of shares in Experience Australia Topco Pty Ltd totalling AUD$24.7 million in value. The AUD$24.7 million was allocated—AUD$2 million to Mr Hawthorn, CEO of Cruise Whitsundays (who held share options), AUD$6.9 million to Mr Murphy, leaving AUD$15.8 for Mr Dold. The AUD$6.9 million for Mr Murphy was 100 per cent of his portion of the price, whereas the AUD$15.8 million was 30 per cent of Mr Dold’s portion of the indicative price. This allocation was the outcome of an agreement between Mr Murphy as the sellers’ representative, and Experience Australia Topco Pty Ltd. There was no allocation for Mr Jacobs. Apparently he did not want any equity in the takeover company.
[14] On settlement of the sale in October 2016, there were shareholder distributions for the shares in Cruise Whitsundays Pty Ltd as follows:
Dold trustees (46.89 per cent) AUD$21,764,817 Carrajung Holdings Ltd
(46.89 per cent)
AUD$37,518,759
Luberon Nominees Ltd
(6.23 per cent)
AUD$2,234,353
Rollover amounts:
Dold trustees AUD$15,753,942
Luberon Nominees Ltd AUD$6,973,719.
[15] The plaintiffs say that Luberon Nominees Ltd received more than its shareholding entitlement and that was at the expense of the Dold trustees.
The parties’ claims
[16]The plaintiffs sue the defendants under four causes of action:
1breach of fiduciary duty;
2breach of the shareholders’ agreement;
3negligence; and
4money had and received.
[17] For the first three causes of action, the plaintiffs target both the payment of AUD$4 million and the allocation of the rollover equity in Experience Australia Topco Property Ltd. For the fourth cause of action they target only the payment of AUD$4 million.
[18] As well as denying liability, the defendants raise an affirmative defence of estoppel, and counterclaim for relief under ss 164 and 174 of the Companies Act 1993 in respect of Marine Tourism Management Ltd. Mr Dold and Mr Jacobs are alleged to have conducted the affairs of Marine Tourism Management Ltd in an unfairly prejudicial manner because they arranged for the company to meet their personal motor vehicle expenses and income protection insurance premiums, whereas Mr Murphy did not have those expenses covered by the company.
[19] For a second counterclaim, Mr Murphy and Luberon Nominees Ltd sue the plaintiffs in deceit for representing that he could have the AUD$4 million in return for his agreeing to sell the shares in Whitsunday Cruises Pty Ltd when they would not, in truth, allow him to have good title to that sum. The defendants claim as losses profits they would have received if the sale of the shares in Cruise Whitsundays Pty Ltd had not gone ahead.
[20] For a third counterclaim, Luberon Nominees Ltd sues Mr Jacobs under the shareholders agreement for not performing his obligations in a reasonably competent and careful manner. Mr Jacobs is said to have breached the agreement through his work as executive director of Cruise Whitsundays Pty Ltd by making bad management decisions in engaging a chief executive officer who was not up to standard, introducing a faulty new reservation system software, and not acting on instructions to remove the chief executive officer. Luberon alleges that but for these breaches, Cruise Whitsundays Pty Ltd would have earned higher profits. Damages are claimed for Luberon’s share of the lost profits.
The discovery application
[21]The defendants’ discovery application seeks these orders:
(a)An order that Mr Pitfield file an affidavit of documents that complies in all respects with his obligations under r 18.15(2) of the High Court Rules;
(b)An order that Mr Dold and Mr Jacobs each file a supplementary affidavit listing categories of documents:
(i)Relating to personal expenses (motor vehicles, income protection insurance, etc) on-charged by each of them to Marine Tourism Management Ltd, South Sea Cruises Ltd and/or Cruise Whitsundays Pty Ltd.
(ii)Relating to the extent to which the parties to the proceeding did or did not meet their respective obligations under the shareholders’ agreement, including (but not limited to) any expressions of opinion, appraisals and/or critiques in respect of each other’s contributions as shareholders and particularly pertaining to:
(A)The introduction of a new reservation systems software for Cruise Whitsundays Pty Ltd, and
(B)the employment of Peter O’Reilly as CEO of Cruise Whitsundays; and
(iii)Relating to forecasts, including associated working papers, for Cruise Whitsundays from April 2012 and for all later periods;
(iv)Containing comment, record, advice or opinion or otherwise relating to the decision of Mr Dold and Mr Jacobs to pay AUD$2 million each to the second defendant the subject of this proceeding;
(v)Relating to Mr Dold’s wish to take more than 30 per cent “rollover” equity in Experience Australia Topco Pty Ltd; and
(vi)Relating to the income split between Mr Jacobs and his (now) wife Leigh Efferion, including (but not limited to) income tax returns and bank statements.
[22]The application also seeks an order against Marine Tourism Management Ltd:
(a)to file an affidavit of documents stating whether it holds
(i) financial statements for the years ending 31 May 2000 to 31 May 2017;
(ii) records of directors’ expenses met by Marine Tourism Management Ltd; and
(iii) records of remuneration payable and paid to Mr Jacobs and his wife, including (but not limited to) bank statements and tax returns.
Preliminary matters
[23] The plaintiff’s application sought an unless order for discovery by Messrs Dold, Jacobs and Pitfield—that the proceeding be stayed unless they file affidavits of documents within 10 working days of the court’s order. The case does not require such a heavy-handed approach. The plaintiffs have tried in good faith to make proper discovery. If they have not done so and further discovery is required, that does not give any grounds to stay the proceeding.
[24] As often happens with applications for further discovery under r 8.19, the plaintiffs responded by filing further affidavits of documents to address the deficiencies alleged by the defendants. That should have narrowed the matters in contention. The defendants did not however say whether any of the matters in their application had been satisfied. The plaintiffs submitted on the basis that everything in the defendants’ application was in issue. In the hearing the defendants did not say that any parts of their application had been satisfied. I will follow the plaintiffs’ approach and assume that the defendants require a decision on every part of their application. All the same, the scope of the hearing could have been reduced with some considered concessions by the defendants.
[25] The plaintiffs have not applied for further discovery by the defendants. Part of the plaintiffs’ case consisted of complaints that the defendants had not made disclosure
or that the defendants had not made adequate disclosure themselves. In the absence of a formal application for discovery those arguments are only rhetorical.
[26] In resisting the defendants’ application, the plaintiffs have made the point that some of documents for which the defendants seek discovery and inspection are also in the control of the defendants. That highlights that documents may be in the control of both sides. Under r 8.7 for standard discovery each party is to disclose documents that are or have been in that person’s control (and meet the adverse documents test). Rule 8.16 similarly requires the schedule to the affidavit to identify discoverable documents in a party’s control. Under r 1.3 of the High Court Rules:
control, in relation to a document, means—
(a) possession of the document; or
(b) a right to possess the document; or
(c) a right, otherwise than under these rules, to inspect or copy the document.
[27] Accordingly, a party is required to disclose a relevant document if they have a substantive right to inspect or copy it, even if they do not have legal or actual possession of the document. The document may also be under the control of the other side as well. An example is statements for a bank account in the names of both parties. Does that mean that both sides have to list the bank statements in their affidavits of documents? Apparently so, because r 8.16 recognises an exception:
(5)The schedule need not include—
(a) documents filed in court; or
(b) correspondence that may reasonably be assumed to be in the possession of all parties.
[28] The exception is limited to correspondence, for example, email chains, but does not apply to other documents under the control of both sides. As the exception proves the rule, the schedule is to include other documents within the control of both sides. This could lead to pedantic insistence on disclosure of documents by one side to which both sides have equal access. There is an obvious inefficiency in both sides preparing schedules identifying documents individually which both have access to.
This is a matter which responsible counsel should be able to resolve co-operatively under r 8.2. In many cases proportionality will relax any requirement to stick rigidly to the rules.
[29] The matter arises here because the plaintiffs have identified documents for which the defendants have the same substantive rights of access:
(a)The electronic data room set up for due diligence on the sales of the shares in Cruise Whitsundays Pty Ltd. They say that Mr Murphy, who handled legal matters and acted as their agent, set it up.
(b)Files of the law firm that acted on the sales of the shares in Cruise Whitsundays Pty Ltd. The plaintiffs and the defendants were all clients of the law firm.
(c)Records of Marine Tourism Holdings Ltd and Marine Tourism Management Ltd which shareholders may access under s 178 of the Companies Act 1993 and which directors may inspect under s 191.
[30] The plaintiffs have addressed the matter appropriately. They say that Mr Murphy is able to access the electronic data room (and he does not deny that). They have provided a link to the files of the law firm. While Mr Pitfield’s affidavit lists documents of Marine Tourism Holdings Ltd and Marine Tourism Management Ltd, he makes it clear that Mr Murphy as director of both companies is entitled to inspect all records of the companies held by Staples Rodway Ltd. The matter does not require further directions from the court.
[31] The plaintiffs object to disclosing some documents as irrelevant, but in doing so they rely on their theory of the case, not the defendants’. Although it is against them, the plaintiffs cited Associate Judge Matthews in Cares Appliances Ltd v Smith City (Southern) Ltd:2
2 Cares Appliances Ltd v Smith City (Southern) Ltd [2014] NZHC 1979 at [19].
The documents sought must be relevant by reference to those issues which will actually be in issue before the Court. There is no place in this assessment to overlay the mandate in r 8.7 with a preliminary and necessarily only partially-informed view of the strength of the case of the party applying for discovery.
[32] With due respect to the learned judge, that applies only so far. It is correct of course that relevance is decided by the case of the party seeking discovery and pleadings decide relevance. Normally the court will not rule on the merits of an issue to decide whether documents relevant to that issue should be discovered.3 But there are cases where it is obvious from the pleadings or the circumstances of the case that the party seeking discovery is on a hiding to nothing on a particular issue. While the documents bearing on that issue may be technically relevant, it would be a waste of time to require the other side to disclose them. In that case requiring discovery of those documents would be disproportionate. There is no need for the court to order discovery of documents under r 8.19 when it will serve no useful purpose.4
Further discovery by Messrs Dold and Jacobs
Personal expenses documents (motor vehicles)
[33] Mr Murphy says that Mr Dold and Mr Jacobs were able to charge their motor vehicle expenses to the companies, but he was not similarly reimbursed. He says that the plaintiffs have not discovered records showing payment of motor vehicle expenses. I accept that documents relating to fuel charges are relevant, as they go to the counterclaim by Luberon Nominees Ltd under s 174 of the Companies Act 1993.
[34] Mr Dold says that he and Mr Jacobs purchased their own vehicles with their own funds, but they did charge their fuel costs to the companies. They did that because they were working directors. He says that the reimbursement of their fuel costs was not recorded separately, but was included with the purchase of petrol by sales representatives. There were no separate records of fuel bought by Mr Jacobs and
3 Edward Bray The Principles and Practice of Discovery (Reeves and Turner, London, 1885) at 19.
4 For an example of discovery being refused because the applicant could not hope to succeed on the merits, see McCullagh v Robt Jones Holdings Ltd [2015] NZHC 1462, (2015) 22 PRNZ 615 at
[30] and [44], upheld on review in Robt Jones Holdings Ltd v McCullagh [2016] NZHC 2529 at
[39] and [43].
Mr Dold. He notes that this practice had been going on for 27 years and Mr Murphy did not complain about it until this proceeding. The affidavit of documents by Mr Pitfield lists amongst the discoverable documents fixed asset registers for certain years. That would go to show whether the companies owned vehicles used by Mr Dold and Mr Jacobs. In a late affidavit of 27 February 2018, Mr Dold attached trial balances for Marine Tourism Management Ltd for the years 2013 to 2016. These documents show an expense under “Motor Vehicles” but without further analysis.
[35] The plaintiffs say that the amount charged to Messrs Dold and Jacobs for motor vehicle expenses was $13,566.25. Luberon Nominees Ltd was a 6.2 per cent shareholder. It is entitled to that percentage of any reimbursement. That would be
$841.00.
[36]For this decision, the plaintiffs’ claim that the motor vehicle expenses were
$13,566.25 is contestable. For all I know, Mr Murphy may be able to establish that the motor vehicle expenses came to more than that. Even so, the sums in issue require a proportionate approach. I see little benefit in requiring the plaintiffs to make further searches for documents when the potential benefit to Luberon Nominees Ltd is only a few thousand dollars at the most. The cost of extracting source documents going back over many years could well exceed the sums in issue.
Income protection insurance
[37] Documents relating to income protection insurance are relevant because of Luberon Nominees Ltd’s counterclaim under s 174 of the Companies Act. It says that the premiums paid by the companies were benefits Mr Dold and Mr Jacobs received as a result of their control of the company when they ought properly to have carried those costs themselves.
[38] Mr Dold says that the income protection policies were owned by the companies—first, Fullers Bay of Islands Ltd and later Marine Tourism Holdings, and Marine Tourism Management Ltd. The companies paid the premiums. His policy was cancelled in 2012 but the policy for Mr Jacobs was continued. That was vindicated, because Mr Jacobs fell ill in 2015. The insurance company paid Marine Tourism
Management Ltd (not Mr Jacobs) under the policy. Attachments to Mr Dold’s affidavit show renewal notices issued by the insurance company to Marine Tourism Holdings Ltd. The discovered documents include an Excel spreadsheet of payments made by the insurance company after Mr Jacobs suffered his heart attack.
[39] That disclosure by the plaintiffs is sufficient. The discovered documents seem to show that the income protection policies were owned by the company, not by Mr Dold and Mr Jacobs personally; that the company paid the premiums; and that the company received payments when the claim was made under Mr Jacobs’ policy. The defendants have the disclosure required to allow them to run their argument under s 174 of the Companies Act.
Reservation system software
[40] In its counterclaim against Mr Jacobs, Luberon Nominees Ltd sues for breach of the shareholders’ agreement for executive decisions made by Mr Jacobs in two respects:
(a)the introduction of reservation system software, JRS, for Cruise Whitsundays Pty Ltd; and
(b)the employment of Mr O’Reilly.
The system was allegedly defective because it did not enable the company to enter its costs and revenue yields and, as a consequence, it could not undertake financial analyses of performance compared with budget. The defendants plead that Mr Dold and Mr Murphy took this matter up with Mr Jacobs, but he failed to act on it.
[41] In an affidavit of documents sworn on 29 August 2017, Mr Jacobs has listed documents identified as PL 04.003-PL 04.0069, which he says relate to the reservation system software. They cover a date range from May to August 2012. In his affidavit of 28 September 2017, Mr Jacobs believes that he provided all relevant documents relating to the introduction of the software system. On the other hand, Mr Murphy says that the bulk of those documents pre-date the installation of the software. He says
that the relevant documents are those produced after installation. He says that inadequacies in implementing the software resulted in an inability to track financial performance and issue timely invoices, and led to accumulated losses of over AUD$22 million. These failures jeopardised a newly-established relationship with Westpac Bank.
[42] I accept the relevance of the documents sought. At trial, the plaintiffs may be able to avoid liability by showing that a management decision as to the introduction of software for a reservation system goes with carrying on a marine tourism business. Not all decisions are perfect and mistakes may be made, but such mistakes do not entail breach of the shareholders’ agreement. This is not an appropriate case to determine that issue on an interlocutory application. Sometimes the court may refuse to order disclosure of arguably relevant documents on the ground that the issue being pursued is not seriously arguable on the ultimate merits.5 But that does not apply here.
[43] Under r 8.19, the defendants have done enough to suggest that the plaintiffs have relevant documents which they have not discovered, namely documents that reflect the difficulties encountered from the implementation of the reservation software. There are grounds to believe that the documents exist. Mr Murphy’s evidence points to the existence of the documents because he refers to difficulties in the banking relationship arising out of inadequacies of the reservation software. The plaintiffs do not deny the existence of this class of documents.
[44] In my judgment, it is not unreasonable to require the plaintiffs to search for further documents under this head. While there is no absolute obligation to seek out and discover every arguable document,6 under the criteria in r 8.14(2) there seems no reason why the plaintiffs could not make an electronic search of available data for those documents. The scope of further discovery under this head needs to be refined. It is possible that some of the financial records already disclosed may cover some of this. I expect counsel to take instructions and to confer on defining more closely the scope of discovery under this head.
5 See [25] and fn 4 above.
6 NSK Ltd v General Equipment Co Ltd [2015] NZHC 1979 at [24].
Employment of Mr Peter O’Reilly
[45] Mr Jacobs was responsible for taking on Mr Peter O’Reilly as chief executive officer of Cruise Whitsundays Pty Ltd in 2012. There seems to be no dispute that Mr O’Reilly’s performance was sub-standard. By mid-2013 the company was taking steps to terminate his employment. Luberon Nominees Ltd says that Mr Jacobs’ decision to employ Mr O’Reilly was a breach of the shareholders’ agreement and pleads that Mr O’Reilly’s incompetence showed up in a number of ways. Examples given are failing to ensure fuel efficiencies (fuel being a major expense), not assisting Mr Jacobs with failures in the new reservation system, not adopting proper reporting measures for accidents involving the company’s vessels, and not following proper management practice in confirming the veracity of expense claims. These failures are said to have caused losses to Cruise Whitsundays Pty Ltd and Mr Jacobs should account to Luberon Nominees Ltd for its share of the profits it would otherwise have earned.
[46] These claims are contestable. A contrary argument would run that while the engagement of Mr O’Reilly as chief executive officer may be seen with hindsight as mistaken, it was not a breach of the shareholders’ agreement. That is a matter for trial. The allegations as to Mr O’Reilly are in issue and generate discovery obligations. Attachments to Mr Murphy’s affidavits include documents recording dissatisfaction with Mr O’Reilly’s performance and steps taken in 2013 to terminate his employment.
[47] The plaintiffs’ response is that the key issue is whether there were good grounds to employ him in the first instance. His competence or otherwise, while chief executive officer, cannot be imputed against Mr Jacobs for breaching his obligations under the shareholders’ agreement. Documents relating to Mr O’Reilly’s performance are irrelevant.
[48] That stance presupposes that Mr Jacobs cannot be faulted for having engaged Mr O’Reilly. It ignores the consequences of a finding that Mr Jacobs did breach the shareholders’ agreement in taking on Mr O’Reilly as chief executive officer. In
discovery, the case of the party seeking discovery, is assumed to be true—not that of the party resisting discovery.7
[49] In his affidavit of 27 February 2018, Mr Dold says that he carried out a search for O’Reilly documents and has attached a schedule identifying certain O’Reilly documents, these include:
(a)a job offer of September 2012;
(b)an email of April 2013 as to issues;
(c)another document of June 2013 called “Job Description” and a letter of offer to Peter O’Reilly and a manager’s employment contract; and
(d)termination documents made in July 2013.
[50] It is not, however, clear to me that the plaintiffs have discovered all relevant documents under this head. There is an arguable substantive issue as to the effects of engaging Mr O’Reilly, including costs that the companies would not have incurred if a competent chief executive officer had been engaged. There is a case for more extensive discovery as to these effects. I do not intend that the plaintiffs should make extensive discovery under this head. It should be focussed. I will give a general direction but with a view to counsel refining it.
Documents evidencing strained relationship between Messrs Dold and Jacobs
[51] The defendants seek discovery of documents evidencing a strained relationship between Mr Dold and Mr Jacobs. In support, they have put in evidence copies of emails showing testy communications between Mr Dold and Mr Jacobs that Mr Murphy received. In their application they sought disclosure of expressions of opinion and appraisals of each other’s contributions as shareholders with particular reference to the reservation system software and the employment of Mr O’Reilly. The appraisals are relevant to those two issues. After all, if Mr Dold criticised Mr Jacobs’ performance at the time, it would be relevant to any evidence by Mr Dold that the
7 Edward Bray The Principles and Practice of Discovery (Reeves and Turner, London, 1885) at 18.
plaintiffs were satisfied with Mr Jacobs’ decisions. It is not clear that the plaintiffs have made complete discovery under this head as Mr Dold rejects them as irrelevant. Given that position, further checks are required.
[52] The defendants also say that comments by the directors about each other’s performance generally are also discoverable, because the relationship between Mr Dold and Mr Jacobs became strained. Both Mr Dold and Mr Jacobs acknowledge that their relationship was strained in later years, but they deny that the documents are relevant. The defendants explain that the documents go to the decision to sell the shares in Cruise Whitsundays Pty Ltd and Mr Dold’s and Mr Jacobs’ willingness to pay AUD$4m to Mr Murphy. At trial, Mr Murphy will run an argument that Mr Dold and Mr Jacobs were so heartily sick of each other that they would do anything to sever their ties, even if that meant abandoning a profitable business in the Whitsundays and paying AUD$2m each to Mr Murphy after he put the squeeze on. It is necessary to see how that fits into the case.
[53] In a claim for breach of fiduciary duty, differences between the beneficiaries of the fiduciary duty do not provide a defence for breaching the duty. The claim for breach of the contract is for breach of the shareholders’ agreement. The defendants do not say that the shareholders’ agreement was no longer in force or that it had been discharged. The differences between Mr Dold and Mr Jacobs do not provide grounds for other parties to the agreement to breach it, while the agreement remains in force and has not been discharged or cancelled. Similarly, for the claim in negligence, any differences between Mr Dold and Mr Jacobs are not a defence to any breach of duty of care by Mr Murphy. The claim for money had and received relies on economic duress applied by Mr Murphy. The differences between Mr Dold and Mr Jacobs may arguably have weakened them so that they could not resist his demands, but any vulnerability arising out of any internal differences between Mr Dold and Mr Jacobs does not legitimise the application of duress to extract an additional payment. If the differences from the strained relationship between Mr Dold and Mr Jacobs were to form part of Mr Murphy’s defence, I would expect to see it raised in the pleadings. It is not.
[54] The alleged connection between the strained relationship of Mr Dold and Mr Jacobs and the plaintiffs’ causes of action is too tenuous to be relevant. I therefore do not require discovery under this head. If I were to order discovery under this head, both sides would be required to carry out a considerable search of documents. Under the “adverse documents” test, documents showing that Mr Dold and Mr Jacobs dealt with each other on civil terms would go to rebut allegations that their relationship was strained. They would be relevant and discoverable as well. Such disclosure would be disproportionate.
Documents containing or relating to forecasts, including associated working papers, for Cruise Whitsundays from April 2012 and afterwards
[55] These documents are relevant as part of the financial records that may need to be disclosed to establish losses arising from alleged breaches of the shareholders’ agreement by Mr Jacobs. The plaintiffs do not contest their relevance.
[56] On the sale of the Cruise Whitsundays’ shares, there was due diligence by the purchaser. For that, an electronic data room was established, with documents for the purchaser to inspect. The plaintiffs say that the electronic data room was set up by Hopgood Ganim, an Australian law firm instructed by Mr Murphy on behalf of the vendors. They say that Mr Murphy was responsible for putting together the data room. The information includes commercial information about Cruise Whitsundays, financial accounts, financial statements, forecasts and contracts.
[57]The plaintiffs say that Mr Murphy still has electronic access to the data room
— just as they do. The plaintiffs have also included in their discovery a warehouse document, PL 03.0023, the Hopgood Ganim file of 1,876 documents.
[58] Mr Pitfield’s affidavit of documents of 1 November 2017 lists certain documents for earlier years that seem to come within the category sought by the defendants. These are documents Pinto Ltd 14.00258-14.00264, 14.00268 and 14.00269. The schedule tendered by the defendants for the hearing referred to a balance sheet projection for 2013 and a financial summary by year from 2012-2017.
[59] The plaintiffs refer to an email by Mr Murphy of November 2016 that confirms that he is collating balance sheets, management reports and forecasts, and say that he has disclosed some of these in his own affidavit of documents. They complain that Mr Murphy is seeking an order for documents which he already has and which he has discovered.
[60] In the hearing, counsel for the defendants did not say whether the defendants’ requisitions had been satisfied or not. I am not able to say whether they are. This is a matter on which counsel ought to confer to resolve themselves. Mr Dold is willing to disclose further documents, if the defendants would only tell him what he is meant to disclose, and if they are still in his control. I see no need to direct discovery of documents which are under the control of both sides.
Documents containing comments, records, advice, opinions as to the decision by Mr Dold and Mr Jacobs to pay AUD$2 million each to Mr Murphy.
[61] Mr Murphy says that Mr Dold has not discovered any documents relating to that decision. He attaches to his affidavit an email chain of October 2016 about the payment.
[62] In response, the plaintiffs refer to their initial disclosure, which included documents from Mr Dold’s discovery affidavit of 15 June 2017 and further documents in his supplementary affidavit of 26 August 2017, including the entire file of the lawyers who acted on the sale.
[63] The defendants have not stated how that disclosure is inadequate or does not meet the requirements of the order for standard discovery. I see no basis for directing any further discovery under this head.
Documents recording evidence or otherwise relating to Mr Dold’s wish to take more than 30 per cent rollover equity in Experience Australia Topco Pty Ltd.
[64] Mr Murphy says that he met with Mr Pitfield before signing the memorandum of understanding which would trigger the due diligence process. He discussed with Mr Pitfield his dissatisfaction with Mr Dold and Mr Jacobs in not recognising his contribution to Cruise Whitsundays Pty Ltd, and discussed the matter of foreign
investment fund tax applying to Mr Dold if he took up less than 10 per cent rollover equity. He also says that Mr Pitfield advised Mr Dold about his rollover investment and the tax position. Mr Murphy accordingly contends that Mr Pitfield has emails and file notes relating to his discussion with Mr Murphy and the advice to Mr Dold.
[65] In response, the plaintiffs refer to their initial disclosure, Mr Dold’s supplementary affidavit of documents of 26 August 2017—PL 3.0010-3.0023 (including the Hopgood Ganim file)—and Mr Pitfield’s affidavit of documents of 1 November 2017 (documents PL 18.0020-PL 18.218), noting that foreign investment fund tax is dealt with under documents 18.0107–18.00134.
[66] The defendants did not state how that disclosure did not meet their requisitions. I see no reason to doubt the plaintiffs’ response and therefore make no order under this head.
Income split between Mr Jacobs and his wife Leigh Efferion, including income tax returns and bank statements
[67] Luberon Nominees Ltd’s counterclaim against Mr Jacobs alleges that he breached the shareholders’ agreement by splitting his income with his wife and thereby exposed Luberon to the payment of penalties and other charges under indemnities given on the sale of the shares, being an antecedent liability that Cruise Whitsundays Pty Ltd might have incurred to the Australian Tax Office. It pleads that Commonwealth tax law did not allow employees to split income to minimise tax. The pleading does not, however, allege that any liabilities actually accrued either to the Commonwealth tax authorities or to the purchaser of the shares. All the same, given that the issue has been raised in the pleading, documents relating to it are discoverable. In their application, the defendants complained that there was inadequate disclosure of documents on this issue.
[68] Even if they did not deal with the matter at the start, the plaintiffs have addressed it in their further discovery. Mr Dold’s affidavit of 26 August 2017 gives Cruise Whitsundays’ payroll printouts for Mr Jacobs from 2011 to 2013. Mr Dold says that he no longer has access to the payroll information but he was able to obtain it from a staff member as a favour to a former director.
[69] Mr Jacobs says that his salary was paid into his personal bank account in Australia. He and his wife separated and his account was closed. He says he can no longer obtain bank statements. He has since contacted his wife and persuaded her to provide her salary payroll records. He has provided them in a supplementary affidavit under numbers PL 21.001–PL 21.002.
[70] The defendants did not submit that the discovery under this head made since they filed their application is inadequate. I see no basis for ordering further discovery.
Documents to be disclosed by Marine Tourism Management Ltd
Financial statements for the years ending 31 May 2011-31 May 2017
[71] Mr Dold’s supplementary affidavit of documents of 26 August 2017 lists the balance sheets of Marine Tourism Management Ltd from 2013 to 2016. Mr Pitfield’s affidavit of documents of 1 November 2017 lists financial statements for Marine Tourism Holdings Ltd and Marine Tourism Management Ltd from 2011 to 2017.8
[72] In the hearing, the defendants did not say that there were any undiscovered documents under this head. I accordingly see no basis for making any order in respect of these documents. This aspect overlaps with the complaint that Mr Dold and Mr Jacobs have not disclosed documents relating to their expenses claims.
[73] Mr Pitfield, as chartered accountant with Staples Rodway Ltd, swore an affidavit of documents on 1 November 2017 listing documents held by Staples Rodway Ltd relating to Marine Tourism Holdings Ltd and Marine Tourism Management Ltd. He has included not only documents within the control of the clients, but also Staples Rodway’s working papers. Working papers are not normally within the control of a client for discovery purposes. The documents appear to include Excel spreadsheets dealing with shareholders and directors’ accounts with the companies, for example documents PL 13.00123-PL 13.00133 and PL 14.0010.
8 Documents 5.0030, 6.0018, 9.0010, 10.0012, 11.0027 and 12.0032.
[74] The defendants have not said how this disclosure is inadequate. Besides, the defendants’ pursuit of documents under this head is disproportionate. As a director of Marine Tourism Management Ltd, Mr Murphy has a substantive right of inspection of the company records including accounting records. He has not shown that his right of inspection cannot be exercised. Mr Pitfield has acknowledged that Mr Murphy is entitled to inspect the company records held by it because he is a director of the company. It does not appear that an order for non-party discovery against the company is required when its accountants are willing to provide documents in their control which Mr Murphy requires.
Records of directors’ expenses met by Marine Tourism Management Ltd
[75] The directors’ expenses that concern the defendants are fuel purchase reimbursements and income protection insurance. I have not required Mr Dold and Mr Jacobs to make any more affidavits as to these documents. I also see no need to require the company to provide an affidavit. As a director of the company Mr Murphy is entitled to inspect the company’s financial records and Mr Pitfield has made it clear that Staples Rodway will cooperate in that. As the documents are in Mr Murphy’s control he does not need the company to make an affidavit as to these documents.
Records of remuneration paid to Mr Jacobs and his wife including bank statements and tax returns
[76] This can only relate to payment of remuneration by Marine Tourism Management Ltd. Mr Jacobs says that until June 2015 he was paid by Cruise Whitsundays Pty Ltd, and paid tax in Australia. Mr Pitfield has disclosed financial records for Marine Tourism Management Ltd during the relevant period. This discovery appears to have addressed salary paid to Mr Jacobs.
[77] The defendants did not articulate why there were outstanding issues under this head. I see no basis for ordering further discovery on this point. I also note that Mr Jacobs’ discovery under this head has already been addressed.
Mr Pitfield
[78] The defendants say that Mr Pitfield’s discovery is defective. He is a former trustee of Carrajung Trust and one of the Dold trustees, but he has not disclosed documents in his control relating to those trusts. He has discovered only documents held by Staples Rodway relating to Marine Tourism Holdings Ltd and Marine Tourism Management Ltd. As one of the plaintiffs he has his own discovery obligations that are independent of the other plaintiffs’.
[79] In response the plaintiffs say that Mr Dold and Mr Jacobs have discovered relevant documents in the control of the trustees and that covers any discovery of trust documents by Mr Pitfield.
[80] Mr Dold swore the affidavit of documents of 15 June 2017 as first plaintiff, and said that he was authorised to make the affidavit on behalf of the other plaintiffs. For his second affidavit, he said that he was authorised to make it on behalf of himself and the trustees of the Dold Trust. Mr Jacobs swore his affidavit of documents on 29 August 2017 for himself and did not say that it was for anyone else. Mr Pitfield swore his affidavit on behalf of Staples Rodway Ltd, the accounting practice of which he is a director. While he is a trustee of the Dold Trust and a former trustee of the Carrajung Trust, he has not discovered documents of those trusts. He stated that documents for those trusts had been separately disclosed by Mr Dold and Mr Jacobs. Mr Jacobs’ supplementary affidavit of documents of 1 December 2017 was for Carrajung Holdings Ltd as trustee of the Carrajung Trust. For his affidavit of 27 February 2017 Mr Dold does not say that he makes the affidavit on behalf of anyone else. I take it therefore that he has made it in his own right only.
[81] The defendants rely on r 8.24 to say that Mr Pitfield cannot rely on his co- trustees to disclose documents in the control of all the trustees. He must swear his own affidavit in addition to any sworn by Mr Dold. To be consistent, the defendants might have submitted that Mrs Dold, also a trustee, should swear her own discovery affidavit, but they did not take the argument that far.
[82]Rule 8.24 says:
8.24 Who may swear affidavit of documents
(1)When a Judge makes a discovery order, the Judge may—
(a)specify by name or otherwise the person who has to make the affidavit of documents; or
(b)specify by description or otherwise a group of persons or a class of persons each of whom may make the affidavit.
(2)If the Judge does not specify the person or the group or class of persons, the affidavit of documents may be made as follows:
(a)if the person required to make discovery is an individual person, by that individual person:
(b)if the person required to make discovery is a corporation or a body of persons empowered by law to sue or be sued (whether in the name of the body or in the name of the holder of an office), by a person who meets the requirements of rule 9.82:
(c)if the person required to make discovery is the Crown, or an officer of the Crown who sues or is sued in an official
capacity, or as representing a government department, by an officer of the Crown.
There was no order under r 8.24(1), specifying who should swear affidavits of documents. The defendants say that r 8.24(2) requires that each trustee make a separate affidavit of documents because an unincorporated trust does not come within r 8.24(2)(b) or (c). The discovery order was accordingly against individuals and under r 8.24(2)(a) each trustee had to make an affidavit.
[83] That is pedantic and runs counter to ordinary practice. Where parties in a proceeding form a group and have a common interest, it is standard for one person in the group to make an affidavit on behalf of them all. When trustees sue, usually only one trustee makes an affidavit of documents on behalf of them all. When a married couple sue, usually only one of them makes an affidavit of documents for them both. In unit title leaky building litigation, affidavits of documents will usually be sworn by a member of the body corporate committee on behalf of the body corporate and all plaintiff owners. In leaky schools litigation, there are usually three plaintiffs— the Minister of Education, the Secretary of Education and the school board of trustees. An officer of the ministry swears a discovery affidavit for all three. Where a firm is a party to a proceeding, typically one partner swears an affidavit on behalf of all. In
some proceedings where both a company and its directors are parties, it is common to see one affidavit given on behalf of both the company and the directors. As an example, in this case Mr Murphy has sworn affidavits of documents both for himself and the second and third defendants. This practice makes for efficiencies. In many of these cases, there is likely to be shared control of documents. Requiring each individual to swear a separate affidavit of documents will duplicate discovery by other individuals. That would lead to more work for the parties’ lawyers and add to the number of documents in the proceeding, but to no advantage. In principle, there can be no objection to individuals in a group co-ordinating to ensure that all documents in their control are set out in a single affidavit.
[84] In these circumstances, it was acceptable for Mr Dold to swear affidavits of documents on behalf of his co-trustees and for Mr Pitfield to record that Mr Dold had given discovery on behalf of the trustees. It would be needlessly pedantic to require Mr Pitfield to swear a fresh affidavit of documents, setting out documents in his control as a trustee when Mr Dold had already done that.
[85] The defendants may be correct that under r 8.24(2)(a) each individual must make a separate affidavit of documents, but it is inappropriate to demand rigid adherence to that rule when it can serve no useful purpose. That would run against the objective of securing the just, speedy and inexpensive determination of a proceeding.9 For good measure I make a retrospective order under r 8.24(1) authorising:
(a)Mr Dold to make affidavits of documents for himself and the Dold trustees;
(b)Mr Jacobs to make affidavits of documents for himself and the fourth and fifth plaintiffs; and
(c)Mr Murphy to make affidavits of documents for himself, Luberon Nominees Ltd and Siena Consultants Ltd.
9 High Court Rules 2016, r 1.2.
[86] The purpose of Mr Pitfield’s affidavit was to disclose records of Marine Tourism Holdings Ltd and Marine Tourism Management Ltd held by Staples Rodway. That was non-party discovery, apparently given without any order under r 8.21. The defendants say that Mr Pitfield has not disclosed any records of the Dold Trust even though Staples Rodway holds trust records as accountants for the trustees. The defendants seek a general discovery order against Mr Pitfield. They have already requisitioned Messrs Dold and Jacobs under r 8.19 for documents which they contend should have been disclosed but which have not been. They have not identified any relevant documents or classes of relevant documents in the control of Mr Pitfield which might the subject of a further discovery order which have not been addressed already in the application against Messrs Dold and Jacobs. Mr Dold made an affidavit on behalf of all the trustees and is accountable if he has not made proper disclosure for the trustees. Mr Dold accepted that responsibility in his first affidavit of documents, and Mr Pitfield was entitled to rely on him to obtain discoverable documents. I see no reason to require Mr Pitfield to duplicate Mr Dold’s efforts. If the application to require Mr Pitfield to make another affidavit is not duplicitous, it fails as an attempt to require disclosure of documents that are not relevant to the issues. That smacks of fishing.
[87] The defendants also required Mr Pitfield to disclose documents as a former trustee of the Carrajung Trust. I accept the plaintiffs’ submission that documents of the Carrajung Trust are held by current trustees. By resigning from a trust, a former trustee can no longer retain trust assets against the replacement trustees.10 They are no longer in his control. Mr Jacobs has taken responsibility for discovering Carrajung documents, not Mr Pitfield. Accordingly, I see no grounds for requiring Mr Pitfield to make a further affidavit of documents.
Outcome
[88] The application for Mr Dold and Mr Jacobs to file and serve a supplementary affidavit of documents is granted—only to this extent:
10 Trustee Act 1956, s 47; Lemery Holdings Pty Ltd v Reliance Financial Services Pty Ltd
(2008) NSWSC 1344, (2008) 74 NSWLR 550.
(a)That they disclose any documents (other than those already disclosed) bearing on increased costs or losses incurred by Cruise Whitsundays Pty Ltd or Marine Tourism Management Ltd resulting from the introduction of a new reservation system software for Cruise Whitsundays, and the employment of Peter O’Reilly as chief executive officer of Cruise Whitsundays. The documents are to include any appraisals or criticisms of Mr Jacobs’ performance on these two matters.
(b)In all other respects, the application against the plaintiffs is dismissed.
[89] The application for non-party discovery by Marine Tourism Management Ltd is dismissed.
[90] The application for Mr Pitfield to file and serve an affidavit of documents is dismissed.
[91] As regards the discovery of documents relating to losses arising from the reservation system software and the engagement of Mr O’Reilly, counsel should confer as to the scope of discovery. I have in mind that the defendants should disclose those documents which they would require to be disclosed if they were making a claim for financial losses arising from the engagement of Mr O’Reilly or the introduction of the reservation system software. There is no need to repeat discovery already made. Counsel should file and serve a memorandum setting out the agreed categories of documents to be disclosed. They should also confer as to the time required to make a new affidavit.
[92] This case is to be called in my chambers list on Friday 8 June 2018 at 2:15pm. If counsel have not agreed on the matters by then, I will hear counsel and give directions.
[93] As to costs, the defendants have been vindicated in having applied for further discovery. They obtained further documents when more affidavits of documents were filed after the application and before the hearing. On the other hand, I am not inclined
to grant the defendants all the costs of the hearing. The defendants’ lawyers ought to have conferred with the plaintiffs’ lawyers with a view to reducing the differences between them. The refusal to do so was a breach of the duty of co-operation under r
8.2. In the hearing, they received only a small part of the relief they were seeking. That partial relief should also be effected in costs awarded. With those indications, I invite counsel to confer as to costs. If they cannot agree, I will hear argument in chambers on 8 June 2018 at 2:15pm.
……………………………….
Associate Judge R M Bell
Solicitors / Counsel:
Cameron Fleming & Associates, Auckland Keegan Alexander (Sean McAnally), Auckland D Heaney QC, Auckland
13
6
1